Tax Considerations for Multi-State Operations

by Marty Kirshner, CPA, MSA , Gray, Gray & Gray, LLP 

Expanding your footprint adds layers of complexities to tax compliance

For heating oil and propane distribution companies operating across multiple states, navigating the complex web of tax obligations requires careful planning and meticulous record-keeping. The expansion into neighboring states often brings significant revenue opportunities, but it also introduces layers of compliance requirements that demand attention from leadership and accounting teams.

Physical Presence and Economic Nexus

The concept of nexus has evolved dramatically in recent years, particularly following the Supreme Court’s South Dakota v. Wayfair decision. For fuel distributors, nexus can be triggered not only by physical presence such as storage tanks, delivery trucks, or sales offices, but also through economic activity reaching certain thresholds. Many states now impose economic nexus standards based on revenue or transaction volumes, typically ranging from $100,000 to $500,000 in annual sales or 200 transactions.

In our industry, the presence of storage facilities or regular delivery routes almost always creates physical nexus, requiring companies to register and file returns in those jurisdictions. However, even without physical assets, substantial sales volumes to customers in neighboring states may trigger economic nexus and corresponding tax obligations.

Payroll Tax Complexities

Managing payroll across state lines presents unique challenges for fuel distributors. Delivery drivers frequently cross state boundaries, creating multi-state withholding requirements. Companies must carefully track the time employees spend in each jurisdiction and apportion wages accordingly. Some states have reciprocity agreements that simplify this process, but many require withholding from the first dollar earned within their borders.

Additionally, unemployment insurance must be paid to the state where the employee primarily works, with careful attention to multi-state employees who may trigger obligations in multiple jurisdictions. Workers’ compensation requirements also vary significantly by state, requiring separate policies or endorsements for cross-border operations.

Sales and Use Tax Considerations

The application of sales and use tax to fuel sales varies dramatically between states. While many states exempt heating oil and propane sold for residential use, the same products may be taxable when sold for commercial purposes. Companies must maintain detailed records of customer classifications and exemption certificates to support tax treatment decisions.

Furthermore, equipment sales and installation services often have different tax treatments than fuel sales. A company might need to collect sales tax on tank installations in one state while the same service is exempt in another. Regular reviews of state-specific regulations are essential as requirements frequently change.

Motor Fuel Taxes and Environmental Fees

Interstate fuel distributors face a complex array of motor fuel taxes and environmental fees. Each state maintains its own requirements for licensing, reporting, and remittance of these taxes. Companies need robust systems to track the movement of fuel across state lines and ensure proper tax collection and payment in each jurisdiction.

Some states require tax to be paid upon import into the state, while others impose tax at the time of sale to the end user. Understanding these distinctions is crucial for proper tax planning and compliance. Environmental fees, such as spill prevention and remediation charges, add another layer of complexity to interstate operations.

Technology and Compliance Management

Modern heating oil and propane companies need sophisticated software systems to manage multi-state tax compliance effectively. These systems must track sales by jurisdiction, maintain customer exemption certificates, calculate appropriate tax rates, and generate required reports for each state. Investment in proper technology infrastructure often pays for itself through reduced compliance costs and audit exposure.

Regular compliance reviews and updates to tax determination systems are essential as state requirements evolve. Companies should establish clear processes for monitoring regulatory changes and updating their systems accordingly.

Risk Management and Audit Defense

Operating across multiple jurisdictions increases exposure to state tax audits. Maintaining detailed documentation of tax decisions, including nexus determinations, taxability decisions, and exemption certificates, is crucial for defending positions during audits. Companies should establish clear protocols for responding to audit inquiries and maintain organized records of all multi-state activities.

Regular internal reviews of compliance processes can help identify potential issues before they become problems during an audit. This proactive approach often proves less costly than addressing issues discovered by state auditors.

Increased Scrutiny Ahead

As states continue to seek additional revenue sources, fuel distributors can expect increased scrutiny of their interstate operations. Staying ahead of changing requirements through proper planning, technology investment, and regular compliance reviews is essential for sustainable multi-state operations. Companies that prioritize tax compliance as a core business function will be better positioned to manage these challenges while maintaining profitable growth across state lines.

Marty Kirshner leads the Energy Practice Group at Gray, Gray & Gray, LLP, a business consulting and accounting firm that serves the heating oil and propane industry. He can be reached at (781) 407-0300 or mkirshner@gggllp.com.

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